China and Indonesia’s ‘developing’ status muddies post-pandemic recovery

Trade is the key to China’s and Indonesia’s economic recovery. But this will be hampered by their new World Trade Organization designation.

Global economic recovery in 2020 is hampered by the rapid spread of the coronavirus. According to Kristalina Georgieva, managing director of International Monetary Fund (IMF), the pandemic has created a new recession phase predicted to be worse than the 2008 financial crisis.

Especially for China and Indonesia, the Organization for Economic Cooperation and Development (OECD) projects that Chinese economic growth in 2020 is below 5 percent, the lowest in 30 years and Bank Indonesia (BI) also lowered its optimistic forecasts for Indonesia’s economic growth in this year from 5 -5.4 percent to 4.2 – 4.6 percent.

The main cause is the decline in manufacturing process and low trade activities.

This will certainly disrupt the global supply chain which causes delays in the distribution of goods in the international trade triggering supply shock. It is a condition where the lack of supply of raw materials, auxiliary materials, and capital goods causes production costs to surge.

China is one of the world’s largest production centers and strategic trading partner not only for Indonesia but also many countries. Thus, trade is the key to the economic recovery of China and Indonesia after the Covid-19 pandemic.

This, however, would not be easy given that their status at the WTO has been changed.

China and Indonesia’s “developed countries” status at the WTO

At the end of his presidential term, Donald Trump continued to issue populist policies on trade. The US implements free, fair and reciprocal trade relations through restrictive policies to reduce its trade balance deficit. The report from the Economic Policy institute shows that its trade deficit particularly with China since 2001 resulted in the US losing nearly 4 million jobs.

In 2019, the US succeeded in narrowing its overall trade deficit for the first time since 2013, including with China. The trade deficit declined 1.7 percent to $616.8 billion in 2019, the first time in six years that it was equivalent to 2.9 percent of GDP, down from 3 percent in 2018. The trade deficit with China also fell 17.6 percent to $345.6 billion in 2019 by placing higher tariffs for Chinese products.

To improve the trade balance and increase domestic manufacturing growth, the US required more aggressive policies. The Coalition for a Prosperous America (CPA) shows that China accounted for half the US trade deficit, and developing countries contributed a quarter of the deficit. Thus, the US conducted a review of several developing countries such as China, Indonesia, Brazil, South Africa, and India and uplifted their status to “developed” in February 2020.

This strategy was more subtle than simply trying to defeat China. The US is still using a non-tariff measurement strategy through Countervailing Duties (CVD) – additional duties on imported products to prevent dumping practices. This condition is different from the US-China trade wars where the US directly raised import tariffs on Chinese goods.

In determining the criteria of developed and developing countries, the US Trade Representative (USTR) has developed a new method, and it does not refer to the per capita Gross National Income (GNI) parameters that are commonly used by the World Bank.

According to the World Bank, the GNI per capita of Indonesia and China is $3,800 and $9,400 respectively which means that both countries are categorised as middle-income countries or developing countries. To be a high-income country or developed country, the GNI per capita must be above US $12,000.

However, USTR’s newest method claims that the criteria of a developed country are the significance of the country’s international trade role above 0.5 percent, membership in international organisations, and its economic development.

Seeing these indicators, China and Indonesia certainly cannot avoid being categorised as developed countries. First, China contributed almost 14 percent and Indonesia was about 1 percent of total global export. Second, both countries are members of the Group of Twenty (G-20). Third, their economic growth is relatively high.

Negative impacts on trade

With this status, the US could do anything deemed unfair by China and Indonesia.

As developing countries, the government should give export subsidies and central banks may depreciate its currency to make their domestic products more competitive in the international market.

Then, the US could ask the World Trade Organization (WTO) to place trade sanctions with high fines for China and Indonesia.

The US could also diminish special preference for developed countries.

For example, As about 3,500 Indonesian goods received Generalized System of Preference (GSP), this policy certainly exacerbates its trade balance.

A simulation of Global Trade Analysis Project (GTAP) by the Institute for Development of Economics and Finance (INDEF) shows that a 5 percent increase in Indonesian goods tariff by the US would lower the aggregate export products to the US by 2.5 percent.

The main decline export occurs in footwear exports which are predicted to drop 2.2 percent, alongside textile products, rubber, Crude Palm Oil (CPO), machine components and electricity which fall by around 1 percent each.

In fact, the US is a strategic trading partner for Indonesia. According to Indonesian Statistics, the US is the second largest export destination country after China with a value of US $17.7 billion or 11 percent of Indonesia’s total exports in 2019.

In addition, Indonesian and American trade balance exhibits positive performance within the last 5 years. The Ministry of Trade indicates Indonesia’s trade balance with the US in 2019 recorded a surplus of US $8.4 billion and an increase of around 2.5 percent from 2018.

As their status as developed countries negatively impact their performance of trade balance, which is essential for their recovery in post-Covid19, Beijing and Jakarta should cooperate in protesting their status, especially to gain access to Subsidies and Countervailing Measures (SCM).

They could also cooperate with other affected countries such as South Africa and Brazil to ensure that their economic recovery after the Covid-19 pandemic would not be hampered.